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tv   Options Action  CNBC  February 1, 2013 5:00pm-5:30pm EST

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before we go, take a look at the big day on wall street. all the major averages hit winning streaks for the first time since august. here are the leaders. this is what took it above 14,000. bank of america, best performer, up 3.5%, united technologist, verizon, at&t, american express. financials and telecom, the
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leading sectors. you did have a handful of stocks unable to participate in the ral rally. merck down almost 2%, hp, johnson & johnson just higher and home depot. goggle hit an all-time high. check it out. heavy volume as well. stock now at 775.60 a share. good way to end off the week for the bulls. that's for sure. thanks for joining us on "the closing bell." i'll see you sunday on "on the money" program. stay with cnbc. "options action" begins right now. >> this is "options action." tonight, miss the dow 14,000 rally? relax. eyeing one tech stock that could have your portfolio back in the
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game. bet on netflix? whether the stock jiengt goes up, down or nowhere at all. how would you like to get paid for shares at exxonmobil at a discount? the crude deal. the action begins right now. nasdaq markets in the heart of new york's times square. i'm melissa lee. these are the traders and these are the days you need to be in stocked. 14 grand and counting, closing at the highest level since 2007. is it too late to get in? how should you play right now? this move to 14,000 and beyond, it's happening without technology, in large part and despite the lower move we've seen in apple. >> no doubt about t apple aspect is a very bullish thing. a lot of people, especially in q-1 last year when apple really went parabolic, i felt it was dragging the market up with it, almost 5% of the s&p at one point, 20% of the nasdaq.
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we have a broad ral lichlt apple's not participating. let me just tell you, people, this thing scares the heck out of me up here, all this complacency. futures are down four points in the last month alone. there's a lot of complacency. i hate the euphoria. i think you have to wait and take a pause. i think the complacnecy. >> why are you so hung up on the vix being at -- >> i don't care about spot vix. >> if the vix is a measure of complacency for sure. look at the s&p 500 today versus 2007, it's 14. then it was 16. >> are you bullying me? are you bullying me? >> i'm just saying, you could say complacency is out there, and the vix is low.
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there's a reason people want to get into stocks right now, mike coe. >> not exactly sure that i go along entirely with the notion that stocks are cheap. forward-looking basis it certainly seems that way. a couple of things you need to consider. if we did have an increase in rates, that will pressure the waited average cost for capital, business will bring their earnings down and based on interest rates. if you see too much euphoria on the economic side, the fed would have to rein back. stocks would rise. take a look at the stocks leading the market thoechlts are very highly valued names. home builders? those things aren't cheap here. stocks like amazon, not a cheap stock by any means. take a look at the whole picture. microsoft, intel, i would actually see people -- >> home builders, to mike's
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point, some people will make an argument that they're fully valued or overvalued at this point. energy is up 8%, financials up 6%. what do you make of this rally here? >> my worried a little bit. for today, you would have expected the s&p to take a step back in the middle of the day, maybe consolidate. it never did that. since march '09, memories are just too short. the vix now, you could buy some protection, stay long, fully invested and actually feel good about your position. the only worrisome trade i saw was people bought a boatload of vix call -- >> somebody bought the april 2025 call spread, paying 75 cents, 150,000 times, massive trade. it was something that a lot of option traders had their eye on.
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one more point on the valuation. we talk about tech not participating right here. xlk is up versus those other sectors, 5%, 6%, 8%. tech that is have gone apple, gone par bachlt olic, trading at very stretched multiples and starting to discount future growth. it makes me nervous here when we see stocks like protector, home depot, colgate. >> low volatility means, of course, protection is cheap, enabling a lot of people to stay low in the markets and be willing to give the rally the benefit of the doubt essentially. >> that's exactly right. if you're sitting here on the si sidelines thinking to yourself, gee, should i be buying more money in stocks, the answer is absolutely not. but that low volatility makes calls cheap, too. it makes them a very good substitute for people who can't help themselves.
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i would much rather see people buying two, three-month calls to make bullish bets to the upside with premiums low if they're going to try to trade that way. >> let's talk about technologies specifically. that might be an area people are looking at simply because it hasn't participated right here. you're looking at yahoo! >> i hate this market. i'm not buying any stocks here. i get a list together, structures together, things i want to do on a pullback. yahoo! to me, i don't think on stock or valuation. q-4 earnings this week, well received by the new ceo, marisa mayer. there are things that have to happen for this thing to work. i want to wait till this stock pulls back but in a name i'm interested in getting long exposure in, if we do get a pullback. this is a good time to do that. you're getting ready to do something if the market moves in
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your direction. >> the strategy you're using is pretty complicated. it's call a call spread risk reversal. use that money to buy a call spread. we want that stock to go to the short call strike. since we're also short input, we must be willing to. >> there's some catalyst, asian assets that are really important. this company has $5 of their market cap in cash, no debt. some analysts think their asian assets are worth up to $15. they have this new ceo in place, start cutting costs, continuing to buy that stock and figure out a plan to fix search display ads and they're mobile. if she can do all that, the stock could be really cheap. i was looking at july expiration, okay? i want to sell a put. i want to do it when the stock is ticking lower so i'm
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adequately compensated. 1965 when the price is up today i could sell the july 18 put at 65 cents and buy the july 20, 22 call spread for about the same price. that structure costs me nothing. it's basically neutral on expiration between $18 and $20, because i haven't paid anything for it. i can make up to $2, between 20 and 22. here is the thing. i put the stock on 18 july expiration. if stokt starts moving lower, i'll show losses in my account on this thing. at the end of the day, if i was going to buy this stock lower than here, this is a decent structure, gives you a really good risk reward. i want to do it when stocks are lower. >> why july? what are the catalysts? >> been under wraps here a little bit. this is her first quarter here. i think she'll get out on the
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tech conference circuit, speaking at goldman sachs in a couple of weeks. the company used to have an analyst day in may or june. people will get excited if they do that. and ipo for alibaba. here is something that could explode the valuation on this stock. >> are you a believer in the yahoo! story, mike? >> it's interesting. i like this trade for a couple of reasons. one acres lot of value, smart value investors that i know of liked yahoo!. it's always hard to chase stocks. this one obviously has a bit of a boost. this helps to take advantage of it. put the stock at a lower level. whether we believe it should be this way or not, volatility is low. by selling those options you're essentially not paying a whole lot of premium. i like the trade. >> want to buy yahoo! as a late rally play. worst case scenario, you could be forced to buy yahoo! stock for $18 a share even if it falls
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below that level. it does work out to about an 8% discount. our next option, that is the hottest stock of the year, netflix, up more than 80% in the past month, tops the s&p 500. the company is making a major bet on original accountant with the launch of its "house of cards" series, which goes on its streaming content all day today. julia has been combing the street for reaction. >> it's not just a bet on exclusive content but also a bet on a different viewing model. netflix is offering all 13 episodes at once. counting on that to draw new subscribers to binge view. after they binge viewed a little bit, they'll stick around. seems pretty bullish, says the show looks and feels like an hbo or show time series. morgan stanley scott devitt issued a statement saying the
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content strategy is key to its long-term growth, saying the opportunity has an opportunity to reach what he estimates is the potential market of 50 million subscribers. on the downside, netflix has such a big percentage of the u.s. market, could be increasingly difficult to accelerate its subscriber growth. netflix itself is not seeing any ratings. melissa? >> julie, this is interesting to me. we laughed when he they announced who the cast was for this "house of cards" and what the cost was to create this sort of content last year. to me isn't floridathere a ton if you don't like this thing? if i don't like "girls" i certainly like "game of thrones," and i'm going to stick around and not cancel that thing. if i'm left with their crappy streaming product they have a big problem, because that is a horrible product. >> the thing is they have, what, 23, 25 million domestic streaming subscribers who are happy to pay $8 a month for
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streaming. this will bring in new subscribers and maybe make you, not so satisfied with the streaming options, sti stick around. the thing is that they don't expect everyone to like "house of cards." they just want it to be another thing that makes their streaming subscribers satisfied and excited about the product. >> julia, thank you so much. joining us from l.a. will the netflix rally last? a quick take from the man who correctly called the rally when the stock was at a mere 80. carter, what do you see now? >> i have one chart. i really want to talk about the concept here. markets are inefficient. markets are very efficient on getting individual stocks to where they belong after epic news. when a stock like this releases its earnings after the close on the 23rd, portfolio managers, individual investors are trying to assess the datea. it will move up ten, down ten
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and overnight it finally gets settled. this thing surges 65 pre%. after a reset like that, not a minor gap but epic gap, a stock will stick and stay. it's been here dead flat for over a week. it's almost now two weeks. and essentially the principle is this. markets are inefficient but on the day of major data, drug release or big miss or big piece of news like this a stock will get stuck to where it belongs and then it stays stuck. thousands of man hours are going into it overnight, trying to figure out how wha does this mean. right now it is a pair of twos. not particularly bearish, not particularly bullish. it's the kind of thing i would expect to do what it's done. start to be quiet and go nowhere. >> mike, what's your take on this stick and stay thesis? >> i think this is unproven. to dan's point, what they're
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hoping is that they are going to cling to existing subscribers rather than build new ones, they're paying up essentially to deliver the same product. that's kind of a risk. they have to bring in the new subscribers. another list is look at who the competition is. their competition is going to be amazon, the cable providers and conventional entertainment giants like disney, reporting soon. that's a pretty strong list of opponents. and finally valuation. here is an interesting statistic. if i told you that you could buy a stock at 12.5 times earnings, you would thiching that was a good value. earnings per share over the last 40 quarters. at 186.5, it's trading at almost a market multiple of that ten years. to me the valuation of this company is pretty incredible. i wouldn't short it, but i would sell the call spread. >> obviously, mike is bearish. he will sell the call spread.
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usually we buy them. let's open the playbook and see how this works. to define your risk you buy a higher strike call. you want the money to be below the strike of the call. that's where you moo make the most money. walk us through the trade, mike. >> i'm selling the march 170, 175. it expires march 1st. i'm selling the 170s at 11.30, buying the 970 for $1.20, collecting $2.10. i'm risking 2.90 if it goes up. obviously if it drop i have an opportunity to cover this at a discount. >> quickly, what do you make of mike's trade? >> it makes a lot of sense. netflix is consolidating. i don't hate the stock as much as dan does. it seems that it it's gotten ahead of itself. >> but dan likes "girls" on hbo. >> i didn't hear that.
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>> i heard something different. you can hear what you want to hear. stocks versus options. netflix, how would you like to blow up your portfolio? had you shorted netflix this year you would be down 80%. to make a maximum of $2.10, best of all can make money whether netflix goes up, down or nowhere at all. we'll see carter later on in the show. send us a tweet @cnbcoptions. our new website has been recamped. check it out. in addition to blogs and feeds, take a look at options action. >> that trade certainly delivered. last week, coe and carter made a bearish bet. will they hold out for more
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[ cows moo ] [ sizzling ] more rain... [ thunder rumbles ] ♪ [ male announcer ] when the world moves... futures move first. learn futures from experienced pros with dedicated chats and daily live webinars. and trade with papermoney to test-drive the market. ♪ all on thinkorswim. from td ameritrade. welcome back to "options action." time for the upside call. we take a look back. coe and carter made a bold call last week, saying amazon was going lower. they were right. here is how they made a lot of money. on "options action" our very own golden rule, risk less so you
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can make more. that's exactly what coe and carter did with their bearish bet on amazon. amazon shares had gotten overextended. >> we think you faded here. too much of a good thing. >> shorting the stock, not even with your worst enemy's money. to define his risk, he bought the april put for $10.75. that put it is below the cost of the trade by april expiration. but $10 just to get bearish on amazon? come on, mike. let's do this for's. >> sell the 245s against it. >> now you're thinking. to spend less, mike sold the april 245 put for $5.30 and created his put spread. but he did something even better. he made making money easier. here is how. buying one put and the 530 he collected by selling the other,
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mike cut the cost of his trade in half to just $5.45. now instead of needing amazon to fall below 254.25 to make money, he can see money if they hit below 259.55 by april expiration. there is a tradeoff. because he sold that put, mike's between the put that he bought and the put that he sold. amazon has fallen 4%, making this trade a winner. now options actions biggest fans are clicking to and fro, to find the answer to their most burning question, what will coe and carter do now? >> they want me to say a word in there. had you had the guts to short amazon, you would have made just over 4%.
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mike's options trade costs just under $55. can be sold for a return of 25%. amazon was one of the few names that did not participate in today's rally. what does that mean for the stock? got to get back to carter. >> this acts poorly day-to-day, not participating and didn't really do well in its earnings, despite the euphoria initially, so stay short. >> what would you say, dan? >> listen, i'm long and april put, to me this is an absolute bubble. i think it will really react like apple did in september. and don't forget here, people, the expectations are very high this year. earnings were supposed to be up 1,000%. if there's any roadblocks i think this thing goes back easily. >> what are you going to do at this point? >> we traded out in april to give ourselves a little bit of time for this to play out. i'm absolutely going to stay short here. i think i've indicated i have a
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great deal of concern about the market generally. high-flying names like amazon particularly. absolutely i'm going to stay short here. >> i would pull the trigger and take a profit. shorts have gotten their faces ripped off at amazon. i would not stay too long here. >> wow! a lot of other tech stocks did not -- i mean, at least amazon was at or close to a two-week high before it started selling out. >> i think amazon benefited from money coming out of apple, looking for some real growth. >> right. >> i think it showed that. here at this point, expectations are very high. the stock made a new all-time high just last week. avoid this one. >> reminder as we head to break, if you want updates, follow us on twitter. dan posts regular updates of his trades on twitter. you can also like us.
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time now for the final call. mike? >> i'll stay in that amazon put spread. if you haven't bought one, there's still time. >> i want to buy puts here. i'm cautious. >> our time has expired. i'm melissa lee. thanks for watching. "money in motion" currency trading is up after this break. [ indistinct shouting ] ♪ [ indistinct shouting ] [ male announcer ] time and sales data. split-second stats. [ indistinct shouting ] ♪ it's so close to the options floor... [ indistinct shouting, bell dinging ]'ll bust your brain box. ♪ all on thinkorswim from td ameritrade. ♪
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